Thirst for Reform? Private Sector Participation in Providing Mexico City's Water Supply

Abstract

In the early 1990s Mexico City's Federal District (the D.F.) initiated a series of service contracts with four operators in the private sector - each to be implemented in three stages over ten years. The idea was to introduce competitive pressures and to find out if a "gradualist" approach would reduce social and political opposition to private sector involvement and would allow the government to address pricing problems and strengthen regulatory arrangements.

The case in Mexico City offered an opportunity to observe the advantages and disadvantages of gradualist reform. Unfortunately Haggarty, Brook, and Zuluaga find that the long-term nature of an incremental approach does not match well with the generally shorter-term horizons of elected politicians. Difficult decisions in implementation are left to later years, which pushes potentially unpopular actions onto the shoulders of future administrations, while allowing the current government to claim credit for instituting reform.

The reform planned - and implemented - was not designed to tackle the city's most serious water problems, including overconsumption and waste. And reform did little to change residential consumers' incentives to conserve water.

Overexploitation of the aquifer has been a problem since at least the 1930s. Mexico City is built on a series of drained lakebeds, and the land is soft and prone to settling, or subsiding, as the aquifer is depleted. Several areas of the city center have sunk by over two meters in the past decade alone. And by virtue of its location and elevation, the city's alternative water sources are expensive. The need for change is stark, but the power to undertake reform to tackle broad problems of resource management in the city and surrounding areas lies outside the jurisdiction of the D.F. with the federal government. Such external funding of major supply projects weakens the incentives for conservation. Reform reduced the increasing rate of overexploitation of the aquifer, but partly by simply failing to meet demand.

Reform to provide more equitable and sustainable water delivery must focus on improving the efficiency of operations, on substantially reforming the way water resources are priced and allocated, and on the design, management, and pricing of wastewater services. Federal subsidies for new production must be reduced, prices for system operators and consumers must rise, and more must be invested in the treatment and storage of wastewater - all of which requires strong political leadership.

This paper - a product of Regulation and Competition Policy, Development Research Group - is part of a larger effort in the group to analyze institutional issues in regulated infrastructure. The study was funded by the Bank's Research Support Budget under the research project "Institutions, Politics, and Contracts: Private Sector Participation in Urban Water Supply" (RPO 681-87). The authors may be contacted at [e-mail] or [e-mail].